Market briefing --- Matt (slow)
NYSE --- Julie (slow)
Fed beat --- Su (fast)
welcome to the "world financial report." i'm matt nesto. fiscal third-quarter profits at goldman sachs and lehman brothers rose more than wall street expected and analysts say that will pressure morgan stanley and bear stearns. tomorrow, earnings there are forecast to come in lower.
>> looking at the results today, it makes it likely bear stearns and morgan stanley will report numbers better than most expected. but that's a double-edged sword, the negative side being that goldman crushed the number today and raised the bar for morgan stanley and bear stearns tomorrow.
>> analysts expect morgan stanley to report a bigger decline than its peers and all of those numbers coming before today's results. greg miles filed this report.
>> morgan stanley chief phil purcell may report weaker profits as rising interest rates and slowdown in stock trading hurt investment banking. most of the industry is suffering from a slowdown in equity and bond trading and morgan stanley may feel it more. one reason, the firm's large retail brokerage force of nearly 11,000 brokers. after earnings rose 35% in the first quarter and 63% in the second, morgan stanley's profit may have fallen at least 15% to $1.1 billion or 96 cents a share, according to thomson financial.
>> there's a great deal of uncertainty reflected in the equity markets where there appear to be investors on the sidelines, not participating.
>> trading volume on the new york stock exchange fell in august to its fullest in more than two years. the slowdown resulted in lower commissions for more than 10,000 of morgan stanley's brokers.
>> the retail business, particularly this summer, has really hit the skids, slowing down considerably. morgan will be hurt and that could be a short-term issue if we get a perk up in equities heading into fall.
>> the federal reserve decision to increase interest rates starting in june is hurting bond staels sales at morgan stanley. the firm underwrote $3 billion of bonds in the quarter, down 21% in a year ago. on the investment banking side, morgan stanley helped manage stock sales by $7.8 billion during the quarter, twice the amount of last year and included the $1.9 billion i.p.o. of google. a bright spot for morgan may be energy trading. according to analyst james mitchell at buckingham research, that unit generates about 1/4 of the firm's fixed income trading revenue and they benefit from higher oil prices. back to you.
>> headlines on wendy's, adjusting its third-quarter and full-year earnings per share forecast. they-they're now seeing earnings per share for 2004, $2.25 to $2.30 a share down from $2.32 to $2.37 so it's as much as a dime below the current full-year estimate for the quarter. it's all because of beef costs, which they say are averaging them $1.39 a pound. bear stearns chief executive james cane says that the company may-may also say that the company's earnings fell as bond trading dropped. the firm's u.s. bond offerings tumbled 57% in the last quarter as the fed raised interest rates for the first time in four years. a decline in underwriting suggests a plunge in debt trading, making almost half of bear stearns second-quarter revenue. they may say fiscal third-quarter profit fell to $278 million, or $1.98 a share. $278 million down from $313 a year ago or $2.30. cayne is concentrating more on stocks and expanding into securities clearing, which makes loans to clients to pay for trade. stocks rose after the federal reserve said the economy regained traction. looking at number today -- stocks gapped higher after that fed decision and also got a boost from earnings news and julie hyman has that wrap-up report from the big board.
>> the dow and s&p not closing at the highs of the session, but certainly much higher than before the fed decision and statement. even though the decision, as well as what was contained in the statement, were widely anticipated, investors were encouraged by the fact that the fed said the economy is gaining traction. looking at the charts for the dow and s&p, you can see where they spiked around 2:15 when the fed decision came out and came down, but still above the start of the day. corporate profit news from goldman sachs and lehman brothers with fiscal third-quarter profit up at lehman up 5%, beating analysts' estimates. at goldman sachs, also beating estimates. both of these companies relying more on debt trading fees and commodities trading fees, money management fees rather than traditional trading revenue. also today, wanted to check on the home homebuilders, profit news from k.b. home where fiscal third-quarter profit was up 20%. falling mortgage rates fueling sales there. do want to note k.b. home rose to a record today. d.r. horton,hoff, ryland and lennar all gaining and pulte homes rose to a record today because of k.b. and the home starts report. oil stocks doing well today, energy leading the gains much of the day. the energy index up 2.6% and a lot of these stocks reaching record highs. exxon-mobil with its biggest gain in five months' time, hitting a record high today. chevrontexaco, conoco phillips and occidental, among the others, as well as oil drillers, included in the record highs today. i'm julie hyman, bloomberg news at the new york stock exchange.
>> going to return to the fed decision today. the unanimous decision to raise rates by a quarter of a point, 1.75%. also restating a pledge to carry out any further increases at that previously used cliche, measured pace. i guess i can say cliche, it's been used so much, right, su? su keenan is on the fed beat today.
>> measured pace still in the game. let's talk about what's going on and that's that economists are carefully reading the fed's statement for clues for the next meeting in november. the fed says that monetary policy remains accommodative with underlying inflation expected to be low, such policy can be "moved at a pace that is likely to be measured." there's that word matt likes so much. and the fed says output growth appears to have regained traction and labor market conditions have improved modestly. former fed governor, lyle gramley, says today's widely expected interest rate increase, the third this year, was designed to, in his words, not rock the boat.
>> they've announced a measured pace and doing that over time so this step today is just one more in the process of moving the funds rate back towards a more neutral level. >
> bank one's diane swonk applauds the fed's wording on inflation. the fed says "despite the rise in energy prices, inflation and inflation expectations have eased in recent months."
>> i think at the moment, they're not overly concerned about inflation and they think they have room to catch it if it were to accelerate but they have to get a head start, getting the fed funds rate to 2% and continuing to move from there gets them towards their goal of keeping a stable economy, strong growth, getting the employment markets going again without reiggating inflation in the near term and this federal reserve wouldn't hesitate to move more aggressively if inflation picked up in a year.
>> bear stearns economist said that will happen as commodity prices are rallying.
>> we expect that in 2005, as inflation ticks higher and we think that obviously that's clearly contrary to the fed's view, if inflation is higher than the fed expects, we think they'll accelerate rate hikes and we could see as much as 50 basis points of rate hikes per quarter.
>> pimco's paul mcculley disagrees and was surprised to see the benchmark 10-year note moving higher in reaction.
>> i have to admit that the market 's response to the fed today was perplexing to me because the fed is on a march to get back to a positive real short-term interest rate and they didn't get a signal today that they are close to the end of the market .
>> mcculley's view, the fed is close to the end of raising rates.
>> thanks, su. we only have 20 seconds to tell you bonds were mixed today and gains in the 10-year, but two-year and five-year bonds fell today. coming up, the fed raised rates. we'll look at that on an inflation-adjusted basis.
